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Edited Transcript of SRTS earnings conference call or presentation 14-Feb-19 9:30pm GMT

Q4 2018 Sensus Healthcare Inc Earnings Call

BOCA RATON Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Sensus Healthcare Inc earnings conference call or presentation Thursday, February 14, 2019 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arthur R. Levine

Sensus Healthcare, Inc. - CFO

* Joseph C. Sardano

Sensus Healthcare, Inc. - Chairman, CEO & President

* Kim Sutton Golodetz

Lippert/Heilshorn & Associates, Inc. - SVP and Principal

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Conference Call Participants

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* Alexander David Nowak

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Andrew Jacob D'Silva

B. Riley FBR, Inc., Research Division - Senior Analyst

* Anthony V. Vendetti

Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst

* Benjamin Charles Haynor

Alliance Global Partners, Research Division - Analyst

* Marcel Herbst

* Scott Robert Henry

Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to the Sensus Healthcare Fourth Quarter 2018 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions)

After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Kim Golodetz. Please go ahead.

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Kim Sutton Golodetz, Lippert/Heilshorn & Associates, Inc. - SVP and Principal [2]

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Thank you. This is Kim Golodetz with LHA. Thank you all for participating in today's call. Joining me from Sensus Healthcare are Joe Sardano, Chief Executive Officer; and Arthur Levine, Chief Financial Officer.

As a reminder, some of the matters that will be discussed during today's call are forward-looking statements within the meaning of the Federal Securities Law. All statements other than historical facts that address activities Sensus Healthcare assumes, plans, expects, believes, intends, or anticipates, and other similar expressions will, should, or may occur in the future are forward-looking statements.

The forward-looking statements are management's beliefs based on currently available information. Sensus Healthcare undertakes no obligation to update or revise any forward-looking statements except as required by law. All forward-looking statements are subject to risks and uncertainties, including those risk factors described in the company's Forms 10-K and 10-Q as filed with the SEC. During today's call there will also be reference to certain non-GAAP financial measures. Sensus believes these measures provide useful information for investors. It should not be considered a substitute for GAAP nor should they be viewed as a substitute for operating results determined in accordance with GAAP. A reconciliation of non-GAAP to GAAP results is included in today's financial results press release.

With that said, I'd like to turn the call over to Joe Sardano, Joe?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [3]

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Thank you, Kim, and Happy Valentine's Day to everyone. Since the beginning of Sensus, we've had a track record of double-digit growth. We are thrilled that Sensus continues to keep up the momentum since our IPO in June of 2016 with our 11th consecutive quarter of double-digit year-over-year revenue growth. More specifically, our fourth quarter revenues increased by 25%, and reached an all time high of $8.1 million. In addition, we are very pleased that Sensus consistently achieves our short and long-term business product goals. We expect to continue to build on these achievements throughout 2019.

We shipped 27 systems during the quarter, 15 of them were our premium, excuse me, premium SRT-100 Visions. Recall that these systems have enhanced capabilities such as image guidance, treatment planning software, and comprehensive enterprise integration. As a point of pride, we shipped our 100th Vision system during Q4, and our global installed base is now approaching 400 units. In August of 2018, Sensus received FDA 510(k) clearance to market our new SRT-100+ which adds several innovative features to our SRT-100 product for the treatment of non-melanoma skin cancer and keloids, including an expanded energy range for customized, more precise treatment.

We shipped 3 of these systems during the quarter, including 2 to plastic surgeons who installed the unit specifically for use in treating keloid scars. I pointed out in the past that the keloid market is a very important one for us and one where we can have an enormous impact on patients' lives. We expect continued interest in our SRT systems for the treatment of keloids on the heels of a peer-reviewed paper published in the November issue of SKIN, Journal of Cutaneous Medicine. The paper noted a recurrence rate of only 3% among keloidectomy patients treated post-operatively with SRT, compared with a reported recurrence rate of approximately 71% following keloidectomy without use of SRT. This is a major breakthrough for patients worldwide who have keloids.

We have now trained over 100 facilities, who have SRT technology on how to treat keloids. During the fourth quarter, we also shipped 2 SRT-100 units to a 2-site physician practice in China. Clearly, this reflects demand for our products despite the current geopolitical uncertainty between the U.S. and China and China's economic environment.

China has the world's highest incidence of post-surgical keloid scar formation and we are pleased to be furthering our efforts to eliminate the suffering of millions of people with this condition in that country. While tariffs may have an impact on product demand, I believe the SRT-100 largely transcends that issue as it provides such an important medical solution. Still, the bulk of our customers are using SRT for the treatment of non-melanoma skin cancer and we continue to build supportive evidence for its success.

Just this week, a few retrospective studies were published in the February issue of the Journal of Drugs in Dermatology. That study showed a high cure rates exceeding 97% among patients with a mean age of 82.5 and treated with SRT-100 for basal and squamous cell carcinomas on the lower extremities. Surgery in this area presents many challenges relating to the healing process and SRT is a wonderful option for those patients in that situation.

We continue to support our sales organization with a full range of marketing activities and the first quarter is actually quite robust for us in this regard. Just last week, we were at the 17th Annual South Beach Symposium in Miami, where we generated many new sales leads and we have already begun to follow up with them. Our presence there extended from our booth beyond to the trade show floor to include sponsorship to the keynote address of the President of the American Medical Association, Dr. Barbara McAneny, who by the way is a customer of ours with an SRT-100 Vision product.

We delivered a state of healthcare presentation. In addition, Dr. Mark Nestor ensured the symposium delivered an introductory presentation on superficial radiation therapy, while Dr. Clay Cockerell, Dr. Michael Gold, Dr. William Roth and Dr. David Goldberg each delivered talks related to treatment of non-melanoma skin cancer with SRT. These physicians are some of the top KOLs in the industry and are internationally recognized. I also participated in the CEO panel that dealt with industry partnerships between manufacturers and physicians.

We're looking forward to reinforcing our presence in the dermatology field with our attendance at the American Academy of Dermatology, Annual Meeting next month in Washington, DC, as well as the Annual Meeting of the American College of Radiation Oncology later in the year, during which we will feature our intraoperative radiation therapy product Sculptura.

Turning to Sculptura. We continue to spend significantly on R&D in the fourth quarter, however, less than the prior year. Following a months long process of addressing all FDA questions, we are hopeful this system will be cleared for sale in the coming weeks. In preparation for launch, we manufactured several units to be used in key research institutions with whom we are in discussion. We also completed an expansion of our oncology sales force by hiring 4 experienced territory Managers that have already started January 1. We shipped the unit in December to the Perelman Center for Advanced Medicine at the University of Pennsylvania and expect this prestigious medical center will provide us with additional supportive data for the market.

We expect our Sculptura system, which features key technological advances and carries a list price of $1.5 million will play an important role in the growth of Sensus in the coming years. We've also begun research studies for psoriasis and eczema, which are ongoing and the results are expected to form the basis for marketing to physicians for both the SRT-100 Vision and the SRT-100+.

As a reminder, these studies are being conducted at sites in Austin and Tallahassee and results are expected to be published towards the end of 2019. I want to briefly address the topic of reimbursement. As most of you know, the Centers for Medicare & Medicaid Services or CMS has stated that the main SRT CPT code 77401 is mostly undervalued. Unfortunately, CMS took no action in December -- November with respect to the main code. CMS did however issue a clarification that permits evaluation and management codes or E&M codes to be reimbursed.

Previously some of the administrative contractors were erroneously not allowing E&M reimbursement. We estimate that the effect of assuring this reimbursement is providing physicians access to approximately $1,000 per patient for the episode of care with SRT treatment. CMS has indicated it will review our CPT code 77401 as early as 2020. But no later than 2021. Why we would like this code to have been revalued for the benefit of our physician customers. We note that SRT is still a very lucrative procedure for our physicians.

Before I turn the call over to Arthur Levine, our CFO for more detailed discussion of our financial results, I'd like to touch on our multiple achievements during 2019.

The fourth quarter capped an excellent and active year during which we increased revenues by 28% to $26.4 million. We raised almost $16 million in net proceeds in an underwritten offering of common stock, we opened a new subsidiary in Israel for R&D and to serve as the sales base for Europe and the Middle East and received multiple of U.S. and overseas regulatory clearances for our products.

We strengthened our management team with new hires in sales, marketing and clinical development and engaged additional international distributors. We have an active plan for 2019, including the commercial launch of our Sculptura system increasing awareness for the use of SRT in keloid treatment and prevention and signing additional distributors outside the U.S. and introducing cutting edge lasers.

Now I'd like to turn the call over to Arthur, Arthur Levine. Thank you.

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Arthur R. Levine, Sensus Healthcare, Inc. - CFO [4]

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Thanks, Joe. It's a pleasure to be speaking with all of you today. As Joe mentioned, revenues for the fourth quarter of 2018 increased 25% versus the prior year to $8.1 million. The increase is attributable to a greater number of units being sold, in particular the SRT-100 Vision, which has an average -- a higher average selling price than the SRT-100. We expect continued double-digit revenue growth in 2019.

Gross profit for the fourth quarter of 2018 was $4.9 million or 60.2% of revenues and this compares with $4.3 million or 66.7% of revenues for the fourth quarter of 2017. The decrease in gross margin was mainly due to product mix. We expect that our margins in 2019 will be in the low to mid-60s and they could vary from quarter-to-quarter from changes in the mix.

Selling and marketing expense was $2.4 million compared to $2.1 million for the fourth quarter of 2017. The increase was primarily due to higher commission expense directly related to the increase in sales. Selling and marketing expense will continue to increase in 2019 from additional hiring of sales reps, higher commissions as our sales increased and marketing activities in support of our Sculptura launch.

Our sales and marketing expense for the first quarter of 2019 will be somewhat higher than in the subsequent quarters, due to the timing of 2 large trade shows in February and March. General and administrative expense was $1 million modestly higher than the $0.9 million recorded in the fourth quarter of 2017.

Our research and development expenses were lower in the fourth quarter of 2018 at $1.5 million compared with $1.7 million for the fourth quarter of 2017. The decrease was due to higher expenses in the 2017 fourth quarter associated with the initial submission of our 510(k) application to the FDA for the Sculptura product. We expect research and development expenses to be slightly lower, although still significant in 2019, as we complete the ramp up to production and add more features to the Sculptura based on feedback from luminary sites. We will also be developing new lasers.

Net income for the fourth quarter of 2018 was $0.1 million or $0.01 per diluted share, and this compares favorably with a net loss of $0.4 million or a loss of $0.03 per share for the fourth quarter of 2017.

Adjusted EBITDA for the fourth quarter of 2018 was a positive $0.4 million compared with a negative $0.2 million for the fourth quarter of 2017. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization and stock compensation expense. The positive adjusted EBITDA and net income for the quarter reflect attention to expense control, at the same time that our revenues have been growing.

I'll turn briefly to the financial results for the year ended December 31, 2018. Revenues for 2018 increased 28% to $26.4 million compared with $20.6 million for 2017. Gross profit for the year was $16.9 million or 64% of revenue compared with $13.8 million or 67% of revenue for 2017. Selling and marketing expense was $8.5 million for 2018, compared with $8.3 million for 2017.

General administrative expense was $4.1 million for 2018, compared with $3.7 million for 2017. G&A expense for 2018 includes $0.4 million and stock compensation expense related to grants made during the first quarter. Research and development expense for 2018 was $6.3 million compared with $5.5 million for 2017. The net loss for 2018 was $2.0 million or a loss of $0.14 per share compared with a net loss of $3.7 million or $0.28 per share for 2017.

Adjusted EBITDA for 2018 was negative $0.4 million compared with a negative $2.9 million for 2017. Our balance sheet continues to be healthy with cash and investments of $15.4 million as of the end of 2018. This compares with $11.2 million as of the end of 2017. Recall that during the third quarter of 2018, we raised $15.9 million in net proceeds from an underwritten public offering of common stock and we repay outstanding borrowings on our revolving line of credit.

We continue to have no long-term debt. The $5 million credit facility is still unused and available to us.

With that, I'll turn the call back over to Joe.

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [5]

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Thanks, Arthur. Looking ahead to 2019, we continue to be excited about our prospects and the growing awareness for SRT in the treatment of non-melanoma skin cancer and keloids. And as you know, this is a large market with some 14,000 dermatology practices and 1,000 more surgery practices in the U.S., not to mention the further 6,500 plastic surgeons, 5,500 radiation oncologists and despite our steady growth, we still have a ways to go to penetrate this large market. We expect 2019 to be another exciting year as we develop cutting edge lasers at our facility in Israel and we're hopeful that Sculptura will receive FDA 510(k) shortly and awareness for our SRT systems and their value proposition continues to grow.

So with those comments, operator, we're ready to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Alex Nowak with Craig-Hallum Capital Group.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [2]

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I understand you are not giving --hey. I understand you're not giving official guidance to-date. But when you look at the funnels and the sales potential is going into 2019, where do you want to end 2019 up for SRT-100 placements? And then same question for Sculptura, although, we know it's not yet approved there. So you probably don't have as much visibility as it might?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [3]

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Well, thanks for the question and thanks for being on the call today. We want to continue in the same path that we have in the last 4, 5 years, actually since the inception of the company. We've continued to grow at a 25% to 40% rate. We think that we can continue to grow at that 25% rate. So I would have to say that looking to the future and where we want to be in 2019, ultimately, we want to continue to grow in the same way that we've grown in the history, and we certainly want to have a profitable year in 2019.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [4]

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Yes, understood. And then regarding Sculptura?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [5]

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Regarding Sculptura -- yes, regarding Sculptura, as we -- until we are able to get FDA clearance, we can't commercialize the product. But as I've said before, we are working with 4 to 5 centers of excellence that are -- that we have exchange paperwork with, that are looking to acquire the system and we're very anxious to get those running. Now the first that we shipped before the end of 2018 was UPenn at their Perelman Cancer Institute. It's in the top 10 in the country. We're very, very excited to be able to have the opportunity to work with them. I can also tell you that they're very excited to have the opportunity to work with us and with this phenomenal device. So we expect this to turn into a very long-term relationship that will continue to develop dividends for the company for long time to come and we expect to add to that, that stable if you will of expertise and luminaries that are going to continue to deliver for us on a regular basis, and more importantly for the patients who are going to require this kind of treatment.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [6]

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That's great. And again, congrats on the placement to UPenn, great. Staying on Sculptura real quick, you mentioned the FDA did had some questions on Sculptura. Could you provide some more color on the general focus of those questions, what were they requesting, what additional data do they want to see et cetera?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [7]

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I'm not going to get into the details, but I'll say this, I think we're all aware that the FDA and the 510 (k) process is going through a change. They're going through a conversion and how they're looking at these things versus how they did it in the past. And we've worked very, very well and very closely with the people at the FDA as they are beginning to discover what those new routines and processes are from within and as they explained with us, we've been very, very good and working with them in collaboration with them in providing the data. I can safely say that they have all of the data that they've asked for and require at this time, they have not required any other data. They say that this is all they need. So now it's just a matter of time and we're waiting for them to provide us with the approvals, which we believe will come within the coming weeks.

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Alexander David Nowak, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [8]

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Okay, understood. And then just last question from me. You mentioned that CMS in the 2019 physician fee schedule said that some of the max were not correctly paying for 77401 in addition to those E&M codes. And now in 2019 all the max should be correctly paying for both codes at once. So I guess, really 2 questions about that. One, how many of the 7 max were not paying for both the SRT procedures and then the E&M code at the same time? And then second question is, it's only really 2 months since the change, but are you starting to see increased interest from physicians within those geographies that the max worth paying the extra $1,000?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [9]

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Yes. Let me just clarify a little bit of it. The issue between E&M codes and 77401 are totally separate and totally different. So first, let's address the E&M codes. The E&M codes were not being reimbursed by I would say, 6 out of the 7 max, the 1 in Florida was reimbursing for the rest of the country pretty much was in denial. We feel that that's going to make a difference because especially after going through the South Beach Symposium, and again through the American Academy of Dermatology meetings, those things are going to be made very, very clear to the physicians. And as far as we know, CMS has handed down those mandates to the various max, so that they can begin to reimburse E&M codes. So the doctors are very aggressive, making sure that they're doing all the documentation properly so that they can get reimbursement. So as far as we know, with there being reimbursed as we speak, but I'm sure over time, we're going to hear various incidences here and there, where there might be some glitches in their computers, because it does take some time before that stuff flows downhill. But we expect it to go smoothly and everything should be fine there. Regarding 77401, again, we have to repeat that it has been recognized by CMS that it is an undervalued code, that it needs to be revalued and we continue to pursue CMS, we continue to pursue the agencies, the societies. So that they can revalue these codes at the appropriate levels and we try to make that as efficient and as quickly as we possibly can. We've been working at this since 2014, I don't expect that it's going to be overnight, but they didn't make the incident -- they did make it very, very clear that they are hoping to do it by 2020, but worst case, it will be 2021. Either case, we should exercise and we should see an increase in that code sometime between now and 2021, hoping 2020 is the number.

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Operator [10]

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The next question comes from Andrew D'Silva with B. Riley FBR..

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [11]

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Just a couple of quick bookkeeping ones. First, if you could just let me know what cash flow from operations and CapEx was for the quarter or the year that -- year is actually fine? And while you're pulling that, were you able to ship any lasers during the quarter? And then maybe just discuss, how you see laser market evolving in 2019 versus 2018?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [12]

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While Arthur is pulling those numbers. Let me go over the lasers. I think that, our strategy for the lasers continues to evolve and I think one of the exciting things for us is the fact that the development of the new lasers for what I would call Sensus labeled lasers is moving a lot faster with the development and with the office that we have in Israel that we first anticipated. So we feel that prior to the end of this year, we will be able to submit units, a brand new family of laser units to the FDA and receive FDA clearance hopefully before the end of the year in order to bring those products to market. So I think that we're really encouraged and we're very, very excited for the development that's happened over there, again, much faster than we anticipated. And we think that that's going to allow us to come to market with our own lasers right off the bat and with what we call premium lasers that will hopefully impact the market a lot better than a lot of people have anticipated.

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Arthur R. Levine, Sensus Healthcare, Inc. - CFO [13]

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Okay. And our cash used in operations for the Q4 was approximately $1.6 million and our CapEx for the quarter was around $150,000 that's much less of a cash burn in the fourth quarter compared to a year-to-date Q3 for the average for the first 3 quarters and the CapEx in Q4 was also lower than in Q3.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [14]

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Great, great. Perfect. Yes, that just helps with my modeling process. Thank you. And then just a couple expansion questions. Congrats on getting those 2 systems placed in China, but could you give a little bit color on how Mexico and China are developing this year, last year you somewhat impacted probably by the trade issues in both countries. And I'm figuring that starting to work this stuff out a little bit at this point. So maybe just what are you hearing from your partners and maybe some expectations from the regions, if you could?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [15]

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Well, we're seeing still a lot of interest in China for the products. I think that the trade situations have slowed the process down. But I think that we're there to help our distributor find a way to get these products to their markets and I think we're going to see -- I think we're going to see better results in 2019 versus 2018 and we're excited for those opportunities because there's been kind of a road block if you will, but we're working very, very closely with our partners to clear that road block regardless and get the units to the public, because it's in dire need over there. These keloids are tragic, they're terrible and they grow every day and they're creating more keloids. So we're trying to help them get this product to market to slow that growth down over there and we're working on all kinds of ways to make that happen. And I think that's the reason why it was the first flush, if you will, of getting those 2 units sent over there in December, they were absolutely desperate, and I think we're seeing the same thing in Q1 and Q2 for this year. So I think that'll continue to grow. As far as Mexico goes, we're being very, very cautious with Mexico. We want to make sure that we have the right distribution partner. And so we're slowly working on developing a list of major distributors who can help us in various parts of the country and we're also trying to build the markets to create awareness. So that we're involved in a lot of meetings, there were quite a few people from Mexico at the meeting in the South Beach and we know that there's going to be hundreds more at the American Academy of Dermatology. And we have meeting set up to see what we can do to penetrate that market, but we want to do it right and I think that we'll see some breakthroughs in 2019 as well.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [16]

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Okay, perfect. And this I'm not sure if you've got this CMS, I guess inadvertently posted in internal memo related to bundled payments for just radiation therapy in general. It seems to be going more and more to that value based, episode-based model. How do you think that kind of bodes for Sculptura in the marketplace? And if you haven't seen that that's fine you don't need to dealt too deeply into it?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [17]

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No, listen, I think, we've known of the potential for bundling for payments over the last several years and the lean away from volume-based healthcare to quality-based healthcare. We've known this for the last 10 years, it was a program that quite frankly was put into effect in the law that was disguised under drugs, if you will, back in 2003 and the maturities by 2024. So the technology that we have is right on target with the quality healthcare when you think of its cost effectiveness and the quality to the patients without having any of the collateral damage of the existing technologies that we're up against have today. Our technology is phenomenal for all of these -- meeting these metrics is that the government is trying to achieve and that healthcare is trying to achieve. So we're very excited for what our technology provides.

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Andrew Jacob D'Silva, B. Riley FBR, Inc., Research Division - Senior Analyst [18]

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Okay, perfect. And last question, just related to the SRT-100+. Maybe just a little bit of color on how the market is viewing that now that you started to sell in? And then how do you see the niches evolving over time between the 100 and the 100+ in your P&L?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [19]

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Yes. The 100 is always going to be a standard for us because there's a lot of doctors that just like that technology, it's excellent technology and it provides great service to our customers at the low end of the spectrum -- of the pricing spectrum. The SRT-100+ out of the 3 systems that we shipped, 2 were shipped directly to surgeons, plastic surgeons, who are going to use it specifically to treat keloids. So I think that this is a great sign to see an adaption from plastic surgeons who want to treat keloids and just as an anecdote, although, I mentioned in our text, we have over 100 facilities now that are train to treat keloids. You have to remember that from 3 years ago after we got FDA clearance, when there was none. This is a very, very positive outcome for us with over 100 facilities now wanting to treat keloids and are actively pursuing keloid patients and treating them. And the paper that was just produced that was headed up by Dr. Berman, University of Miami, of the 297 patients with a 3% recurrence rate following 3 years of follow up with these patients. I mean this is remarkable. This is a cure for these patients, where they had no hope whatsoever before because the best numbers of all showed best case 71% recurrence rates. Now we're showing 3% recurrence rates. That's a major in this department. So we get more and more emails every day from people who suffer from keloids, and you can literally cry when you read these notes from these folks and how desperate they are to find a way and how debilitating keloids are in their lives as far as their personality, their characteristic, their confidence all of these things that impact. And so this is a wonderful story that we're developing. And I think it's going to develop for a long time to come.

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Operator [20]

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The next question comes from Anthony Vendetti with Maxim Group.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [21]

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Just on the Sculptura product, the IORT product. The shut down by the government, did that push things out a little bit? Or was it just the questions and like you said, the changes that the FDA is undergoing regarding the 510(k) process?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [22]

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You know what, Anthony, I don't think there was any question that there was a slowdown we saw. The response of this wasn't as it was in the previous couple of months. So I think that there was an impact, but we can't complain because where we're at right now required a lot of work and put us exactly where we need to be and I think, the FDA has everything that they need, they have everything that they've asked us for. And I think that we're going to continue to develop great relationships and I expect approval and clearance at some point in the very near future, within weeks.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [23]

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Okay. And then on the CFDA clearance. You said you sold 2 SRT-100's into China. So is that officially cleared in there in China right now?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [24]

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Yes. No, we had clearance for SRT-100 for 3 indications, quite frankly, we have the product, has the CFDA clearance, which is the SRT-100, we have clearance for skin cancer and we have clearance for keloids.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [25]

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Okay, great. And then on the system, so 15 and 27 were Vision, 1 was the Sculptura, were the others the SRT-100 or were there some aesthetic lasers?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [26]

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I'll let Arthur talk the mix of products that were shipped.

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Arthur R. Levine, Sensus Healthcare, Inc. - CFO [27]

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Yes, 15 were Visions, 1 was the Sculptura as you mentioned and 11 SRT-100's and pluses.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [28]

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Okay. And then on the sales force update, the number of reps that you ended 2018 with is that pretty much what you need? And then you mentioned you hired 4 for the IORT, is that where the additions are coming and are you okay with the number of reps that you entered 2018 with for the record of the business?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [29]

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I think, yes, no, I think that we have the total now of 6 people on the oncology area, we have the total of 20 on the dermatology side and I think we're going to add 4 to 6 new people on the dermatology side. We think that we got what we need for the oncology space, which is 6 and then if we add 4 more people on the dermatology side that will give us 24 there for a total of 30.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [30]

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Okay, great. And then I thought, I heard you say, Joe, that you're expecting some new lasers to come out and you expect to apply for 510(k) approval on the aesthetic side. So by the end of the year from Israel. Is that correct?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [31]

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That's correct.

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Anthony V. Vendetti, Maxim Group LLC, Research Division - Executive MD of Research & Senior Healthcare Analyst [32]

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Okay. And then just lastly, Arthur, I just wanted to verify that you said R&D even though you still have some projects in there should be down slightly overall in 2019 in terms of dollar amount versus what you finished 2018 with, is that right?

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Arthur R. Levine, Sensus Healthcare, Inc. - CFO [33]

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Correct.

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Operator [34]

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The next question comes from Ben Haynor with Alliance Global Partners.

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Benjamin Charles Haynor, Alliance Global Partners, Research Division - Analyst [35]

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Just one quick one from me. Was wondering about the feedback that you've received on Sculptura so far. For example, there is the one you shipped to UPenn, I guess what's your sense of what was the key selling point there, any color you could provide will be good?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [36]

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I think we -- I was present for the first presentation that we made on the product and I think that the feedback from the department was very quick and precise in that. At the end of the meeting they said, they wanted to go through this. Not only did they want to go through it, but they wanted to be the first ones in the world to have it. And they said their motion is in place from there administration to try to get this done as quickly as possible. So negotiations went very, very quickly. We were very happy to have such a prestigious facility, wanting to work with us in developing the product. We have key features in the product that we're extremely important to them in treating patients and they feel that they can help us expand the indications that we originally thought we had into 3 or 4 other indications, which they feel is very, very important. Now it's difficult without FDA clearance to be talking commercially about the product and since we're a short period away from having that and before we can get into that, I would prefer to wait until after that happen. So that we're not in any violation of talking about the product commercially. But I can assure you that not only are they seeing it, but hopefully within the coming weeks we'll be able to announce some other deliveries and installations with other luminary accounts that are going to be big names for us and big names for the market as well. But clearly, robotics is something that's extremely helpful. The type of radiation that we deliver is extremely helpful, the precision with which we can sculpt, the beams are very, very helpful. These are all key new features that have not existed in the market before that is getting everybody excited.

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Operator [37]

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The next question comes from Scott Henry with ROTH Capital.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [38]

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Just a couple of questions. First, with regards to Sculptura, did you book any revenues in 4Q or will that be deferred out. How should we think about that line item in the revenue model?

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Arthur R. Levine, Sensus Healthcare, Inc. - CFO [39]

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Okay. Hi, Scott. Yes, we booked in revenue in Q4 and we were able to do that because University of Pennsylvania is using the Sculptura for research purposes and unlike a commercial entity, there will be no issue related to the revenue recognition. It's delivered, we have all the paperwork in place and this has been discussed with our auditors. So we are -- yes, we included in revenue for Q4.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [40]

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And how should we think about the net price on that, given that it was a research. Does that typically carry a higher discount. Just trying to think about how we should think about pricing as far as how much color you want to give at this point in time?

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Operator [41]

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Pardon me. This is the conference operator. It appears our speaker's line has disconnected. I'm going to put you back on hold. Yes, can you hear me?

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [42]

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I can hear you.

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Operator [43]

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Yes, the speaker's lines is disconnect. Yes, the speakers line its appear to have disconnected. I'm going to put you on hold until we can get them reconnected. One moment please.

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [44]

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Hello?

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Operator [45]

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Okay. Our speakers have rejoined the call.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [46]

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Okay.

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [47]

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Sorry guys, we had some kind of a power surge here and we got cut off. Sorry about that.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [48]

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No problem. Joe, what I was asking was with regards to the amount of revenue that you booked in Q4. Should we think of that as a higher discount, because it was more of a research placement or any color that you could provide for that revenue line would be great?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [49]

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Yes. And as I mentioned in previous conference calls that we were building 4 to 5 units before the end of the year because we had started communication and negotiation with 4 to 5 centers that wanted the system. They were going to be booked at a much lower rate because of the relationship that we were developing with them and since it was the initial installations of these units. It's just the way it goes in most areas when introduce product like this. So they are probably half of what the average selling price is, we were looking at a list price of $1.5 million on these products. We're looking at an average selling price that should be with about a 20% discount, which puts us at about $1.150 million. And so you're looking at maybe half of that number is what we are booking for these products to go in on the initial stages with these 4 to 5 accounts. After that all the phases will be in the $1 million plus number range.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [50]

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Great. I appreciate that color. And then...

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [51]

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Also to let you know, Scott. All of these facilities are luminary teaching facilities, they are installing, these units under an IRB, investigational review board. They will be able to charge patients who are treated on these systems, by having the patient sign off on these units under the IRB and they are covered for reimbursement under the IRB. So they're looking at getting this paid for as well.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [52]

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Okay, great. And then when looking at the SRT. How we -- was pricing relatively stable from Q3 to Q4 as we model that in?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [53]

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The pricing on all of the new -- the systems were all in the 64% to 65% margin range. So we were consistent on that, where we lost some margin is number one, I will tell you that we cooperated very strongly with the people in China to help them overcome some of the deficit of a 25% charge on tariffs, in order to get product to the patients that needed it. We also, since we've upgraded some of our products SRT-100 to SRT-100 Visions, we do have some upgrade products that we've been able to hold the margins on as well. But as you can imagine a used system that is being resold is not going to be at the same margin as a brand new system. And then, of course, the margins on the Sculptura units and the once Sculptura unit impacted the margin as well, but overall, in all of the brand new products that we sell, out the door that still have that 64%, 65%, 66% margin range, but the used the units from to China and Sculptura lowered our margins a little bit during the fourth quarter.

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Scott Robert Henry, Roth Capital Partners, LLC, Research Division - MD, Senior Research Analyst & Head of Pharmaceuticals Research [54]

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Okay, great. Final question just, did you give service contract revenue for the quarter?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [55]

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Service contract revenue has been consistent throughout anywhere between 10% and 12%. I would say, let's go to the lower side of about 10% because we did install quite a few units in the third and fourth quarter, they usually have a one-year warranty on it. So the service contracts don't kick in until next year.

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Operator [56]

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The next question comes from Yi Chen from H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [57]

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My first question is looking at the number of systems shipped in 2018, it appears that the third quarter has the lowest number and first quarter has the highest number. Do you expect that pattern to repeat in 2019? And also in terms of product mix between, 100 Vision and 100+, do you think the fourth quarter product mix could represent what we expect to see in 2019, which is led -- the most number goes to 1 Vision than 100, and then 100+?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [58]

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Yes, I think that you're seeing the trends. Now I will tell you for that for the last, ever since, we've been in business, the third quarter has always been less. The least amount of production out of all the 4 quarters and the fourth quarter has always been the highest production out of all the 4 quarters. And if you're involved in healthcare, you'll see that that's pretty much dominant throughout the healthcare space especially in medical devices. Now, in our case, we've experienced a lower trend in the third quarter because many of our doctors who are single practitioners, many of them run practices even though might be multiple physician practices. They all have families, their kids are out of school and a lot of them take vacations from July, all the way through until they come back on Labor Day weekend. And then 2 or 3 weeks left in the quarter, not much of a left in the quarter for them to make a lot of decision. So that's pretty much, most of these decision makers are not available because they're usually on vacation with their families during that time. And then the fourth quarter seems to be picking up a lot, because a lot of the doctors want to take advantage of perhaps some tax advantages by spending some money at that time and they find as a great time to make a decision. So a lot of them do. So Q4 is always going to be our best number and Q3 is always going to probably be our worst. So this past quarter, however, this past third quarter, the third quarter was a pretty good quarter. We were surprised with how effective our sales organization was, we addressed that at the beginning of the year and I think that we were able to manage our way through it, where we saw good results in every one of the quarters that we had, including the fourth quarter. And then I think that we will see that continue in 2019. I think it'll be the same in 2020, just as it was in '14, 2015, '16 and '17.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [59]

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In terms of product mix, do you think the fourth quarter number is representative of what we can expect to see going forward?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [60]

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We're hoping that it is because we want to lead with our lead product, all the time, it's our -- when we comes to SRT, the Vision product clearly has all of the features, all of the benefits that have tremendous opportunities for the physicians and in providing better treatments for their patients as well as opportunities for additional income. And so, we'll see more IORT products hopefully in 2019 as well, which will also have the major impact on our revenue as well. So as we start talking to hospitals as we start becoming commercially available after FDA clearance, we hope to see a lot more hospitals being able to put this device in their budgets and hopefully they'll be able to get approval within their own organizations to buy these products.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [61]

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Got it. My second question is related to the Sculptura assistant. So just to clarify, this is the same system as a original system called [Salu] app, right, it's the same one?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [62]

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Correct.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [63]

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Once it's commercially launched, how much impact we can expect to see on the sales and marketing line?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [64]

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Well that is hard to predict in the first couple of years, but I think that if you're looking at our growth as we've been growing, let's say, like this year 25% year-over-year. If we continue to do that with our SRT, you can imagine where we could be. With that kind of revenue in 2019. And if you added four, or 5, or 6 Sculptura units and hopefully most of them being at $1 million plus at our targeted average selling price, it could impacted quite a bit. And I think that as we continue to grow with that product, I think we're going to see increased revenues because I think there's going to be a lot more people who want to buy the Sculptura. So hopefully we get to a volume of 10 of these systems at some point in the future and, of course, that's going to be $10 million, and if we do 15, it's going to be $15 million and 20 units is $20 million. So it's going to keep growing accordingly.

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Operator [65]

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We have time for just one more question. And that question comes from Marcel Herbst with Herbst Capital Management.

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Marcel Herbst, [66]

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A quick follow-up on Sculptura, you have four, 5 units to play specifically for Investigational Review Board purpose. Would you expect the remaining units to be placed pretty shortly here in the first quarter? Or what's your expectation there?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [67]

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Yes. I think that it all depends on the institution because they take a lot longer to get those decisions and to get those approvals. Traditionally even when I was back with General Electric selling Positron-Emission Tomography, you can expect anything from 6 months to 24 months before you got a purchase order. Now, I don't think that these institutions are going to take that long. I'm expecting to get all of these institutions installed in 2019, my preference would be the first quarter, but I'm not going to be surprised if it takes us all up to the third quarter as well, because you just can't predict what kind of paperwork, they're going to have to go through internally in order to get these approvals. As you can imagine they're going to have to adjust existing budgets that they have in order to accommodate this. So they're going to have to give up something within an existing budget in order to accept this. So they've got some work to do, but I expect a couple of units that should happen very, very quickly, hopefully in the first quarter. And then, of course, we can't take anything to revenue until we deliver and install. So again, depending on their readiness, it could take anywhere from 3 to 6 months before we deliver anything, but I'm expecting to get those units done.

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Marcel Herbst, [68]

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Okay good, that's good to hear. And also and speaking of the international expansion. Beginning of last year also signed distribution agreements with Korea, Thailand, and I think Germany. Can you talk a little bit about how your effort there is going in terms of how is the demand and the pipelines shaping up for your distributors? And maybe comment on any lessons you've learned and what your expectations are going forward?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [69]

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I expect better output in 2019 than we had in 2018. And I think that '18 was very, very moderate, it seems like the European markets, were very, very slow, there's not a lot of money there. The economy is going very, very bad. Same thing with Latin America, even though we opened up some countries there, I think that the economies are very, very slow, but I think we're developing some good relationships and we're going through the beginning of selling cycles there now. Asia is going to definitely going to provide us with the biggest opportunity and I fully expect China to be healthy at some point, in the very near future. And that will open up the markets to the Chinese markets as well. But because they've been on hold, Korea, Vietnam, Thailand, all of those countries are countries that quite frankly we're expecting business from. How much? I don't know. The governments are going to determine how much business, they'll give us, but I expect business from those countries.

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Marcel Herbst, [70]

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Okay, great, that's helpful. And a quick question on the new advanced lasers that you're developing and you say that you might be able to start commercialization this year. Are these for brands new indications or are these -- is the research focused on improving the current lasers that you're having? With new indications, what indications would that be?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [71]

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Well, I -- when I -- first of all, laser, the laser market is a very well established and mature market. There's a lot of different laser companies out there and they all have multiple lasers. We have a target market that we feel we can address with customers who prefer the type of business that we're offering today. In other words, doctors seemed to be reluctant to continue to have or allow companies to have their hands in their pockets. So something that is that they're not happy with is having to sell consumables, they would prefer to be able to buy products that don't have a consumable, much like with the SRT products are. We have a service element to it. That's a consumable for us, but that's the same type of a model that General Electric, Siemens, Philips, Varian all the bigger medical devices companies have and our doctors are seeing, are getting frustrate. And part of that reason is, if you look at the market that they serve, the services that they provide, whether it's tattoo removal, hair removal, taking away fat, adding fat, removing wrinkles, or chins and things like that. All of those pretty much been commoditized in all of the various communities around the country. So if you call up 10 dermatologists in your area, they pretty much have the same pricing. So you're looking at between $2,500 to feature hair removal or tattoo removal over the course of 2 or 3 various treatments within a few week period. With all that being said, if somebody spend $100,000 on a laser and then has to pay $680 for consumable to treat with that laser and they do 100 treatments a year, that $68,000. That $68,000 out of the physicians pocket. I think that we're trying to put together a product that will allow those doctors to keep that $68,000 and, therefore, I think, we understand their business model, a whole lot better and I think that they prefer to want to work with us on that basis versus having to come up with the money for the consumable all the time. So that's the target that we're looking at and that's something that we think is special and will be unique to our lasers.

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Marcel Herbst, [72]

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Okay, good. Thank you. Maybe one last question, when you look 2, 3 years out actually scale revenues, what's your long-term model on gross margins and operating margins?

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [73]

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Well, we have been managing very, very well over the last several years to the 65% to 67% margin number, we've been consistent in that. And that's what we target most of our products. I would tell you that, I don't think those margins will be sustainable with the laser products. So that's going to be separate and as we continue to grow SRT, I think we're able to continue to maintain those margins, but some of those margins will be impacted by trade-ins, a lot of doctors might be trading up from the SRT-100 to the SRT-100 Vision, so there's going to be a handful of those on every quarter. And then, I think that Sculptura on the other hand, will help us with a lot of those margins as it gains notoriety and we start to promote that product as well. So I think overall, we're going to have a various product mix that are going to continue to keep our margins at very, very high levels, and very productive levels and I think that from a profitability standpoint, all of the products that we're looking at are going to lend itself to providing some big numbers to our bottom line.

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Operator [74]

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This concludes our question-and-answer session. I would like to turn the conference back over to Joe Sardano for any closing remarks.

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Joseph C. Sardano, Sensus Healthcare, Inc. - Chairman, CEO & President [75]

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Thank you, everyone. I think that they were all great questions. We appreciate everybody who asked them. In closing, I want to thank you all for your time this afternoon and for your interest in Sensus Healthcare. I'd like to mention that we'll be participating in the 30th Annual Roth Conference in Southern California on March 18th and the 19th. We'll be conducting some other non-res road shows in the future throughout New York, Boston, Dallas and other parts of the country as well, with the help of our Investor Relations Group at LHA. So we hope to see you in some of those meetings and we look forward to a fantastic 2018.

So thanks again, everybody, have a great day, and Happy Valentine's Day to everyone.

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Operator [76]

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The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.